Oddly, the Government's proposals bear little resemblance to anything the commission recommended. Indeed, some of the core proposals don't appear to have been even considered by the commission, even though the proposals - and one in particular - have the potential to significantly, even radically, tilt the industry playing field against Telstra.

Alston announced the proposed changes to the regime at an ABN Amro communications conference and without any advance notice or consultation with the major affected party, Telstra. That, and the nature of the changes, has Telstra seething.

It is unclear why the Government has developed a policy which disregards the Productivity Commission's recommendations, although Alston did refer to the plight of the industry's smaller players as they struggle to survive without access to capital.

"Telstra is huge, so how can you compete? You can't even afford to build a niche network. Many [small carriers] are on life support and Telstra is going from strength to strength," he said. ");document.write("

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In the formal announcement of the proposals there was also a reference to "evidence of market consolidation" since the release of the commission's report. The Government appears to be concerned enough about the impact of the collapse of One.Tel and a raft of smaller players on the intensity of competition that it is prepared to try to regulate a transfer of Telstra's profits to its surviving competitors.

The measures Alston outlined were limited in number and the announcement was extremely shallow in terms of detail.

The Government plans to require the Australian Competition and Consumer Commission to establish benchmark access prices and conditions for core services which it will use to determine any access disputes. It also plans to remove the right to merit reviews of access arbitrations - in practice, the ability for Telstra to have ACCC decisions within the arbitration process reviewed by the Australian Competition Tribunal.

The merit-review mechanism will only be available in relation to voluntary undertakings - where the ACCC has rejected an undertaking as to the price and terms of access by Telstra or another infrastructure owner. Telstra stopped providing undertakings after the ACCC consistently rejected them.

The benefit of a merit review in relation to undertakings is limited by comparison with a review of the final determination of an arbitration. Effectively the review is of the merits of Telstra's undertakings rather than the ACCC's decision or its methodology.

The impact of the changes may be to force Telstra into the arbitration process on any dispute where it is unable to reach a commercial agreement.

Depending on the philosophy with which the ACCC approaches the setting of benchmark prices and terms, it could effectively provide signals and incentives to access-seekers to choose to either deal commercially or create a dispute.

Once a dispute arises, with the ability to appeal the methodology the commission has used removed, the commission will effectively be able to dictate the price and terms of access. Its power to regulate prices and conditions would be considerably strengthened.

The Government's decisions are curious, given that the commission's report, while recommending retention of the telecommunication-specific regulatory regime, said its support was conditional on the introduction of a better appeals mechanism. It said this was needed to enhance procedural fairness and test the validity of ACCC actions.

The commission also criticised the absence of transparency and accountability in the current regulatory regime.

While all of Alston's proposals have annoyed Telstra, the one that has caused real agitation, both in the company and the smarter end of the market - where there are some estimates that on its worst interpretation it could slice as much as $1 a share off Telstra's value - was Alston's vague statement that the Government would encourage a more transparent "regulatory market" by requiring accounting separation of Telstra's wholesale and retail operations.

Alston said discussions would be held with Telstra and the wider industry about the precise nature and extent of the accounting separation to be pursued.

Telstra is already required to provide separate accounts for its retail and wholesale activities to the ACCC, so why would those comments alarm it?

The disturbing interpretation that Telstra and others read into this is that Alston isn't really talking about separate accounts but the virtual separation of Telstra into a retail company and a wholesale company.

To do that, even if only at an accounting level, would require Telstra to completely reconfigure its business model and strategies.

At present Telstra Wholesale and Telstra Retail don't actually deal directly with each other; indeed in some senses they are competitors. Each develop products independently - Telstra Retail for Telstra customers and Telstra Wholesale for Telstra's competitors. Both leverage off Telstra's infrastructure services group.

Virtual separation, as opposed to separate accounting, would effectively force Telstra Retail to become a customer of Telstra Wholesale.

It would create a vertical relationship which, if accompanied by greater "transparency" and visibility of the transfer pricing within the group, could enable its competitors, with the help of the strengthened ACCC, to get access, products and prices similar to that of Telstra Retail. It would expose its inner workings to its rivals and potentially reduce or remove the scale benefits Telstra Retail has relative to its competitors.

It could undermine the advantage Telstra has as a vertically integrated group and erode the benefit of, and returns from, owning its infrastructure.

It would reduce its margins and incentive to invest. The glee of its rivals when they saw the Alston proposal certainly suggests it would damage its competitiveness and profitability and enhance their own.

Whether the proposal, which wasn't contemplated or even discussed in the Productivity Commission report, is as radical as it appears, and as damaging to Telstra as it could be, isn't yet clear. Given that Alston apparently didn't discuss it with Telstra, it isn't even clear that the Government fully appreciates the implications.

From Telstra's perspective, however, the proposal's potential impact on the group's profits and strategies - and, incidentally, its implications for any further selldown of the Government's shareholding - could be extremely destructive.